The Reserve Bank is set to come under "huge pressure" in the first quarter of next year in the face of a softening property market, a leading Auckland mortgage broker believes.
John Bolton, principal of Squirrel Mortgages, said in a blog on the company's website that he had been warning since September that new RBNZ rules limiting high loan-to-value lending that came into force in October would "bite much harder" than most commentators had suggested.
The latest monthly BNZ-REINZ Residential Survey showed that since the LVR limits came into force first home buyers had deserted the market.
Bolton said there were "bound to be more negative headlines in the press over the coming months".
"We are starting to get the odd comment about auction clearance rates dropping below 50%, which is a huge signal. I suspect we will get our first average price fall reported in January.
"...Bank economists pooh poohed the RBNZ approach and said it wouldn’t work. Many are still sceptical and think this is a temporary aberration."
First home buyers were "clearly" out of the market, Bolton said.
"Almost nobody can buy with less than a 20% deposit. We can sometimes help first home buyers by using guarantees but other than that there are very few options. We still have pre-approvals out there for some existing clients above 80% but these are running out fast.
"We’ve had good settlements in October and November due to our pipeline. But, when it comes to First Home Buyers our pipeline has been dropping rapidly. In terms of new approvals we are down about 50%. This will bite."
He said therefore the RBNZ was going to come under huge pressure around March.
"A soft property market and first home buyers cut out of the market is too political for an election year.
"Look for bank economists to get stuck in, egged on by their masters. I think you could see some exemptions to the new LVR policy creep in for first home buyers around March but no let up for property investors."
Bolton said latest media coverage "would suggest we are heading fairly quickly back into a buyer’s market".
"It can be a good time to buy, but is also a good time to consolidate and cut loose any deadwood."
Selling investment properties
Bolton is himself a property investor and said that he and his business partner had sold three properties this month, including two that "were supposed to be holds". They had repaid $2.3m of mortgages in the past six weeks.
"This is partly because we have a large development in the pipeline, but also because we have struggled to find anything in the market that we would consider good value, and a sense that the market is getting riskier."
Another area of the market that had been severely affected but not given as much public attention was younger property investors, Bolton said.
When getting started in property the idea was to buy, get capital growth and then recycle your deposit into the next property.
"There really is no other way to start. Up until the RBNZ changes, it was possible to buy up to 3 properties at 90%. We had clients with multiple properties at 80% still able to buy the next one at 85% or even 90%. Now, even if you own one property with a 75% mortgage, you no longer have enough equity to buy another property in Auckland. Using leverage to grow your portfolio is basically dead," Bolton said.
Overseas buyers
In terms of interest from overseas buyers, he said there was still a "lot" of money coming in from offshore.
"However, Chinese like to buy in a confident market, they like competition, and they like to buy at auction. They often buy without much due diligence based on location and land-size. They take a lot of advice from the real estate agent (often acting as a buyer’s agent) who points to increasing prices everywhere to justify price.
"Confidence” buying relies on positive media headlines, record prices, busy auctions. When you’ve got lots of positivity combined with unconstrained buying power and a limited supply of property for sale, then you’ve got the perfect storm for price increases.
"Confidence has waned. At the moment, Chinese investors are sitting back more than they have in the past year. They are slightly spooked by the market. If the market surges again, they’ll be back in big time. However, I suspect Chinese will be more subdued over the next year and will buy more off plan."
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